-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, N//yn3BEhl5gF0cVrO6mOuK3fD6+PVGsCrL1H8camIR0shwAyq73AxEwYzbpQxGA Gj7pG6ap9V9yCTdQSGDAxA== 0000040533-97-000011.txt : 19971106 0000040533-97-000011.hdr.sgml : 19971106 ACCESSION NUMBER: 0000040533-97-000011 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970928 FILED AS OF DATE: 19971105 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: GENERAL DYNAMICS CORP CENTRAL INDEX KEY: 0000040533 STANDARD INDUSTRIAL CLASSIFICATION: SHIP & BOAT BUILDING & REPAIRING [3730] IRS NUMBER: 131673581 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-03671 FILM NUMBER: 97708124 BUSINESS ADDRESS: STREET 1: 3190 FAIRVIEW PARK DRIVE CITY: FALLS CHURCH STATE: VA ZIP: 22042 BUSINESS PHONE: 7038763375 MAIL ADDRESS: STREET 1: 3190 FAIRVIEW PARK DR CITY: FALLS CHURCH STATE: VA ZIP: 22042 10-Q 1 THIRD QUARTER 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-Q (Mark One) X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 28, 1997 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number 1-3671 GENERAL DYNAMICS CORPORATION (Exact name of registrant as specified in its charter) Delaware 13-1673581 (State or other jurisdiction of (I.R.S. Employer) incorporation or organization) Identification No.) 3190 Fairview Park Drive, 22042-4523 Falls Church, Virginia (Zip Code) (Address of principal executive offices) (703) 876-3000 Registrant's telephone number, including area code Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes X No . Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common Stock, $1 par value - October 26, 1997 62,879,061 GENERAL DYNAMICS CORPORATION INDEX PART I - FINANCIAL INFORMATION PAGE Item 1 - Consolidated Financial Statements Consolidated Balance Sheet 2 Consolidated Statement of Earnings (Three Months) 3 Consolidated Statement of Earnings (Nine Months) 4 Consolidated Statement of Cash Flows 5 Notes to Unaudited Consolidated Financial Statements 6 Item 2 - Management's Discussion and Analysis 12 PART II - OTHER INFORMATION Item 1 - Legal Proceedings 17 Item 6 - Exhibits and Reports on Form 8-K 17 SIGNATURE 17 PART I GENERAL DYNAMICS CORPORATION CONSOLIDATED BALANCE SHEET (UNAUDITED) (Dollars in millions)
September 28 December 31 1997 1996 ASSETS CURRENT ASSETS: Cash and equivalents $ 202 $ 516 Marketable securities 643 378 845 894 Accounts receivable 170 97 Contracts in process 583 558 Other current assets 290 309 Total Current Assets 1,888 1,858 NONCURRENT ASSETS: Marketable securities 29 261 Leases receivable - finance operations 199 204 Real estate held for development 154 147 Property, plant and equipment, net 508 441 Intangible assets 475 165 Other assets 239 223 Total Noncurrent Assets 1,604 1,441 $ 3,492 $ 3,299 LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 158 $ 182 Other current liabilities 729 651 Total Current Liabilities 887 833 NONCURRENT LIABILITIES: Long-term debt 40 38 Long-term debt - finance operations 106 118 Other liabilities 603 596 Commitments and contingencies (See Note G) Total Noncurrent Liabilities 749 752 SHAREHOLDERS' EQUITY: Common stock, including surplus (shares issued 84,387,336) 138 109 Retained earnings 2,410 2,254 Treasury stock (shares held 1997, 21,524,524; 1996, 21,285,157) (692) (650) Unrealized gain on investments - 1 Total Shareholders' Equity 1,856 1,714 $ 3,492 $ 3,299 The accompanying Notes to Unaudited Consolidated Financial Statements are an integral part of this statement.
GENERAL DYNAMICS CORPORATION CONSOLIDATED STATEMENT OF EARNINGS (UNAUDITED) (Dollars in millions, except per share amounts)
Three Months Ended September 28 September 29 1997 1996 NET SALES $ 988 $ 862 OPERATING COSTS AND EXPENSES 875 773 OPERATING EARNINGS 113 89 Interest, net 11 14 Other income (expense), net (1) - EARNINGS BEFORE INCOME TAXES 123 103 Provision for income taxes 41 35 NET EARNINGS $ 82 $ 68 NET EARNINGS PER SHARE $ 1.30 $ 1.08 WEIGHTED AVERAGE SHARES OUTSTANDING (in millions) 62.8 63.1 DIVIDENDS PER SHARE $ .41 $ .41 SUPPLEMENTAL INFORMATION: General and administrative expenses included in operating costs and expenses $ 83 $ 65 The accompanying Notes to Unaudited Consolidated Financial Statements are an integral part of this statement.
GENERAL DYNAMICS CORPORATION CONSOLIDATED STATEMENT OF EARNINGS (UNAUDITED) (Dollars in millions, except per share amounts)
Nine Months Ended September 28 September 29 1997 1996 NET SALES $ 2,961 $ 2,685 OPERATING COSTS AND EXPENSES 2,632 2,424 OPERATING EARNINGS 329 261 Interest, net 28 40 Other income (expense), net (4) 2 EARNINGS BEFORE INCOME TAXES 353 303 Provision for income taxes 120 103 NET EARNINGS $ 233 $ 200 NET EARNINGS PER SHARE $ 3.71 $ 3.16 WEIGHTED AVERAGE SHARES OUTSTANDING (in millions) 62.8 63.2 DIVIDENDS PER SHARE $ 1.23 $ 1.23 SUPPLEMENTAL INFORMATION: General and administrative expenses included in operating costs and expenses $ 239 $ 183 The accompanying Notes to Unaudited Consolidated Financial Statements are an integral part of this statement.
GENERAL DYNAMICS CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) (Dollars in millions)
Nine Months Ended September 28 September 29 1997 1996 CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings $ 233 $ 200 Adjustments to reconcile net earnings to net cash provided (used) by continuing operations - Depreciation, depletion and amortization 64 49 Decrease (Increase) in - Marketable securities (396) 352 Accounts receivable (21) (30) Contracts in process 116 104 Leases receivable - finance operations 5 4 Other current assets 11 (10) Increase (Decrease) in - Accounts payable and other current liabilities (89) (26) Current income taxes 23 67 Deferred income taxes 18 (46) Other, net 2 (30) Net cash provided (used) by continuing operations (34) 634 Net cash used by discontinued operations (31) (82) Net Cash Provided (Used) by Operating Activities (65) 552 CASH FLOWS FROM INVESTING ACTIVITIES: Business acquisitions (447) (59) Purchases of available-for-sale securities (360) (761) Sales/maturities of available- for-sale securities 725 190 Capital expenditures (50) (49) Proceeds from the sale of assets 7 24 Other (3) - Net Cash Used by Investing Activities (128) (655) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of debt - finance operations - 150 Repayment of debt - finance operations (12) (154) Dividends paid (77) (75) Purchase of common stock (60) (23) Proceeds from option exercises 28 5 Other - (6) Net Cash Used by Financing Activities (121) (103) NET DECREASE IN CASH AND EQUIVALENTS (314) (206) CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 516 215 CASH AND EQUIVALENTS AT END OF PERIOD $ 202 $ 9 SUPPLEMENTAL CASH FLOW INFORMATION: Cash payments for: Federal income taxes $ 63 $ 134 Interest (including finance operations) 9 9 The accompanying Notes to Unaudited Consolidated Financial Statements are an integral part of this statement.
GENERAL DYNAMICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Dollars in millions, except per share amounts) (A) Basis of Preparation The unaudited consolidated financial statements included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Although certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, the company believes that the disclosures included herein are adequate to make the information presented not misleading. Operating results for the three and nine month periods ended September 28, 1997 are not necessarily indicative of the results that may be expected for the year ended December 31, 1997. These unaudited consolidated financial statements should be read in conjunction with the financial statements and the notes thereto included in the company's Annual Report on Form 10-K for the year ended December 31, 1996. In the opinion of the company, the unaudited consolidated financial statements contain all adjustments (consisting only of normal recurring accruals) necessary for a fair statement of the results for the three and nine month periods ended September 28, 1997 and September 29, 1996. (B) Acquisitions On November 3, 1997, the company announced an agreement to purchase the assets of Ceridian Corporation's Computing Devices International unit (Computing Devices) for approximately $600 in cash. The acquisition is subject to certain conditions, including the clearance by the appropriate governmental agencies. Computing Devices is a defense electronics and systems integration business with presence in both the Canadian defense electronics market and the U.S. defense market. It serves defense and other government agencies worldwide, as well as commercial customers in selected markets. Computing Devices provides ruggedized subsystems for harsh environments; real-time software systems; and communication, intelligence and surveillance systems. The acquisition is expected to be completed by the end of the year. Effective October 1, 1997, the company purchased the assets of Advanced Technology Systems (ATS), formerly an operating unit of Lucent Technologies, for approximately $284 in cash. ATS is a leading supplier of undersea surveillance systems, signal processing systems, vibration control systems, and related technologies for a wide range of applications. The transaction will be accounted for under the purchase method of accounting. Operating results of ATS will be included with those of the company beginning in the fourth quarter. Effective January 1, 1997, the company purchased the assets of Defense Systems and Armament Systems, formerly operating units of Lockheed Martin Corporation, for approximately $450 in cash. Defense Systems builds light vehicles, turrets and transmissions for combat vehicles, as well as missile guidance and naval fire control systems. Armament Systems designs, develops and produces advanced gun, ammunition handling and air defense systems, and is a leader in the production of ammunition and ordnance products. The transaction has been accounted for under the purchase method of accounting. Operating results of Defense Systems and Armament Systems are included with those of the company from the closing date. The excess of the purchase price over the estimated fair value of the net tangible assets acquired, approximately $320, has been recorded as intangible assets consisting of contracts and programs acquired and goodwill. The intangible assets are being amortized on a straight-line basis over periods ranging from 30 to 40 years. This allocation is based on preliminary estimates and may be revised at a later date. Effective March 29, 1996, the company purchased the assets of Teledyne Vehicle Systems (Muskegon Operations), formerly an operating unit of Teledyne Inc., for approximately $55 in cash. The transaction has been accounted for under the purchase method of accounting. Operating results of the Muskegon Operations are included with those of the company from the closing date. (C) Intangible Assets Intangible assets consist of the following:
September 28 December 31 1997 1996 Contracts and programs acquired $ 364 $ 149 Goodwill 111 16 $ 475 $ 165 Intangible assets are shown net of accumulated amortization of $22 and $10 at September 28, 1997 and December 31, 1996, respectively. Intangible assets are amortized on a straight-line basis over periods ranging from 25 to 40 years. (D) Liabilities A summary of significant liabilities, by balance sheet caption, follows:
September 28 December 31 1997 1996 Workers' compensation $ 229 $ 239 Retirement benefits 201 179 Salaries and wages 67 68 Other 232 165 Other Current Liabilities $ 729 $ 651 Accrued costs on disposed businesses $ 214 $ 256 Retirement benefits 122 111 Coal mining related liabilities 77 77 Other 190 152 Other Liabilities $ 603 $ 596
(E) Income Taxes The company had a net deferred tax asset of $252 and $270 at September 28, 1997 and December 31, 1996, the current portion of which was $222 and $231, respectively, and was included in other current assets on the Consolidated Balance Sheet. No valuation allowance was required for the company's deferred tax assets at September 28, 1997 and December 31, 1996. Certain issues related to the Internal Revenue Service's (IRS) audit of the company's consolidated federal income tax returns for the years 1977 through 1986 were not resolved at the administrative level. Accordingly, the IRS issued the company a Statutory Notice of Deficiency which the company has been contesting in the U.S. Tax Court. As of the end of the third quarter, all issues raised by the IRS in the Notice have been litigated and the Court found in favor of the company on substantially all of the amount in dispute. The IRS has the right to appeal the Court's decision; however, in the event of an appeal, the company believes the decision would be upheld. In addition, the company had filed refund claims totaling $355 (plus interest) for additional research and experimentation tax credits for the years 1981 through 1990. On October 16, 1997, as part of the Tax Court litigation, the company and the IRS reached an agreement that settled the tax credits for the years 1981 through 1986 for $132 (plus interest). This agreement is subject to approval by the Joint Committee on Taxation. The remaining claims for the years 1987 through 1990 are still being contested at the IRS administrative level and are not covered by the settlement agreement. The exact amount and timing of the net refund associated with the Tax Court litigation and related settlement is not known. However, the company expects the net refund to exceed the amounts previously recorded and, therefore, result in the recognition of additional tax benefits when realization is assured. (F) Earnings Per Share As there is no material dilution, net earnings per share is based upon the weighted average number of common shares outstanding during each period. (G) Commitments and Contingencies Litigation Claims made by and against the company regarding the development of the Navy's A-12 aircraft are discussed in Note H. On May 1, 1997, a jury in San Diego County rendered a verdict of $101 against the company in favor of 97 former Convair employees. In this lawsuit, Argo, et al. v. General Dynamics, the plaintiffs alleged that the company interfered with their right to join an earlier class action lawsuit and concealed its plans to close its Convair division. The jury awarded the plaintiffs a total of $1.8 in actual damages, and $99 in punitive damages. The company is appealing the judgment. The company believes it has substantial legal defenses, but in any case, it believes the punitive damage award is excessive as a matter of law. While the company is unable to assess the ultimate outcome of this matter, management currently believes it will not have a material impact on the company's results of operations or financial condition. General Dynamics Corporation was served with a complaint filed in the Circuit Court of St. Louis County, Missouri, titled Hunt, et al. v. General Dynamics and Lloyd Thompson, seeking a declaratory judgment and rescission of certain excess loss insurance contracts covering the company's self- insured workers' compensation program at its Electric Boat division for the period July 1, 1988 to June 30, 1992. The insurance contracts cover losses of up to $30 in excess of a $40 attachment point in each of the four policy years. The named plaintiff, Paul Hunt, is an individual suing on behalf of himself and other individuals who are members of the Lloyd's of London syndicates and other British insurers who have underwritten the risk. The company does not expect that the matter will have a material impact on the company's results of operations or financial condition. Hughes Missile Systems Company (HMSC) has filed an amended complaint against the company alleging breaches of certain representations and warranties contained in the Asset Purchase Agreement dated May 8, 1992, for the sale of the company's missile business. The amended complaint, which was filed in the Superior Court of the State of California, seeks $42 in damages. The company does not expect that the lawsuit will have a material impact on the company's results of operations or financial condition. In March 1996, the company received a judgment for $26 against the government in General Dynamics v. U.S., a case tried in U.S. District Court for the Central District of California. The company sued the government under the Federal Tort Claims Act, alleging that the Defense Contract Audit Agency negligently audited the Division Air Defense contract, which led to the company's indictment in 1985. The indictment was later dropped. The government has appealed the 1996 judgment. HMSC will receive 30 percent of the net recovery as a result of its purchase of the company's missile business in 1992. The company has not recognized any claim revenue from this matter. The company has been sued as the "alter ego" of Asbestos Corporation Ltd., a Canadian company, in which General Dynamics owned shares between 1969 and 1982. General Dynamics, along with more than 50 other defendants, has been sued in several thousand cases filed in Texas by plaintiffs alleging exposure to asbestos. Although the gross claims attributable to the plaintiffs cannot be estimated, including the share of the company or any other defendant, losses arising from these matters are largely covered by insurance. Therefore, the company does not believe that these matters will have a material impact on the company's results of operations or financial condition. The company is a defendant in tort cases pending in state and federal court in Arizona, as well as in a Comprehensive Environmental Response, Compensation and Liability Act case. The litigation arises out of ground- water and soil contamination at the Tucson airport. The company's predecessor in interest, Consolidated Aircraft Company, operated a modification center at the site during World War II. The company has defenses to the claims, as well as a claim against the government for indemnification. Although the company is unable to estimate its share of any liability arising from these claims, the company believes it is entitled to indemnity from the U.S. for any liability. Therefore, the company does not believe the litigation will have a material impact on the company's results of operations or financial condition. The company is also a defendant in other lawsuits and claims and in other investigations of varying nature. The company believes its liabilities in these proceedings, in the aggregate, are not material to the company's results of operations or financial condition. Environmental The company adopted the provisions of Statement of Position (SOP) 96-1, "Environmental Remediation Liabilities" as of January 1, 1997. SOP 96-1 provides authoritative guidance regarding the recognition, measurement, display and disclosure of environmental remediation liabilities resulting from Superfund or analogous laws and regulations. The adoption of the statement did not have a material impact on the company's results of operations or financial condition. The company is directly or indirectly involved in fourteen Superfund sites in which the company, along with other major U.S. corporations, has been designated a potentially responsible party (PRP) by the U.S. Environmental Protection Agency or a state environmental agency with respect to past shipments of hazardous waste to sites now requiring environmental cleanup. Based on a site by site analysis of the estimated quantity of waste contributed by the company relative to the estimated total quantity of waste, the company believes it is a small contributor and its liability at any individual site is not material. The company is also involved in the cleanup and remediation of various conditions at sites it currently or formerly owned or operated. The company measures its environmental exposure based on enacted laws and existing regulations, and on the technology expected to be approved to complete the remediation effort. The estimated cost to perform each of the elements of the remediation effort is based on when those elements are expected to be performed. Where a reasonable basis for apportionment exists with other PRPs, the company estimates only its allowable share of the joint and several remediation liability for a site, taking into consideration the solvency of other participating PRPs. Based on a site by site analysis, the company believes it has adequate accruals for any liability it may incur arising from the sites. Other The company was contingently liable for debt and lease guarantees and other arrangements of approximately $80 at September 28, 1997. (H) Termination of A-12 Program The A-12 contract was a fixed-price incentive contract for the full- scale development and initial production of the Navy's new carrier-based Advanced Tactical Aircraft. The Navy terminated the company's A-12 aircraft contract for default. Both the company and McDonnell Douglas (the contractors) were parties to the contract with the Navy, each had full responsibility to the Navy for performance under the contract, and both are jointly and severally liable for potential liabilities arising from the termination. As a consequence of the termination for default, the Navy demanded that the contractors repay $1,352 in unliquidated progress payments, but agreed to defer collection of the amount pending a decision by the U.S. Court of Federal Claims on the contractors' appeal of the termination for default, or a negotiated settlement. The contractors filed a complaint on June 7, 1991, in the U.S. Court of Federal Claims contesting the default termination. The suit, in effect, seeks to convert the termination for default to a termination for convenience of the U.S. government and seeks other legal relief. A trial on Count XVII of the complaint, which relates to the propriety of the termination for default, was concluded in October 1993. In December 1994, the court issued an order vacating the termination for default. On December 19, 1995, following a trial on the merits, the court issued an order converting the termination for default to a termination for convenience. The parties have concluded their litigation over incurred costs, the final phase in the U.S. Court of Federal Claims. The contractors are seeking a judgment of $1,202 plus interest. The U.S. government is challenging $378 of the total costs incurred by the contractors as unallowable. A final judgment in the U.S. Court of Federal Claims is expected later this year. Final resolution of the A-12 litigation will depend on the entry of final judgment, the outcome of expected appeals, and further litigation or negotiation with the government. The company has not recognized any claim revenue from the Navy. The company has fully reserved the contracts in process balance associated with the A-12 program and has accrued the company's estimated termination liabilities, and the liability associated with pursuing the litigation through trial. In the unlikely event that the court's decision converting the termination to a termination for convenience is reversed on appeal, and the contractors are ultimately found to be in default of the A-12 contract and are required to repay all unliquidated progress payments, additional losses of approximately $675, plus interest, may be recognized by the company. This result is considered remote. GENERAL DYNAMICS CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE RESULTS OF OPERATIONS AND FINANCIAL CONDITION September 28, 1997 (Dollars in millions, except per share amounts) Forward-Looking Statements Management's Discussion and Analysis of the Results of Operations and Financial Condition contains forward-looking statements that are based on management's expectations, estimates, projections and assumptions. Words such as "expects," "anticipates," "plans," "believes," "estimates," variations of such words and similar expressions are intended to identify such forward-looking statements which include but are not limited to projections of revenues, earnings, segment performance, cash flows and contract awards. Such forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are not guarantees of future performance and involve certain risks and uncertainties which are difficult to predict. Therefore, actual future results and trends may differ materially from what is forecast in forward-looking statements due to a variety of factors, including: the company's successful execution of internal performance plans; performance issues with key suppliers and subcontractors; legal proceedings; labor negotiations; changing priorities or reductions in the U.S. government defense budget; and termination of government contracts due to unilateral government action. Business Segments The company comprises two major business segments: Marine and Combat Systems Groups, as well as miscellaneous businesses classified as Other. The following table sets forth the net sales and operating earnings by business segment for the three and nine month periods ending September 28, 1997 and September 29, 1996:
Three Month Period Nine Month Period Inc/ Inc/ 1997 1996 (Dec) 1997 1996 (Dec) NET SALES: Marine Group $ 547 $ 537 $ 10 $1,693 $1,763 $ (70) Combat Systems Group 372 256 116 1,087 763 324 Other 69 69 - 181 159 22 $ 988 $ 862 $ 126 $2,961 $2,685 $ 276 OPERATING EARNINGS: Marine Group $ 55 $ 52 $ 3 $ 175 $ 161 $ 14 Combat Systems Group 47 34 13 133 102 31 Other 11 3 8 21 (2) 23 $ 113 $ 89 $ 24 $ 329 $ 261 $ 68
Marine Group Results of Operations and Outlook Net sales decreased during the nine month period due to lower submarine construction activity as a result of the delivery of the final Trident submarine and the first Seawolf submarine, partially offset by increased engineering and design work on the NSSN and increased construction volume on the Arleigh Burke class destroyer (DDG-51) program. Operating earnings increased during the three and nine month periods as a result of higher margins obtained from cost reduction efforts and diminishing operating risks as the submarine construction programs mature. The operating margin of the Marine Group for the year is expected to be similar to that reported for the first nine months of 1997. Business and Market Considerations In October, the President signed into law the Department of Defense fiscal year 1998 (FY98) Appropriations Bill which funded all the Marine Group's significant programs, including the NSSN, Seawolf and DDG-51 programs, consistent with the company's expectations. The company has entered into a Team Agreement, dated February 25, 1997, with Newport News Shipbuilding and Drydock Company (Newport News) for the NSSN program. The Team Agreement provides that Electric Boat will be the prime contractor on construction contracts for the NSSNs, and that construction and assembly work will be equally shared with Newport News through a subcontracting arrangement. Electric Boat will retain the lead design role. The FY98 Appropriations Bill includes a provision that authorizes the Secretary of the Navy to enter into a contract for the construction of the first NSSN and for the advance procurement of material for the next three NSSNs under the terms of the Team Agreement. Details concerning construction beyond the first four NSSNs under the terms of the Team Agreement were not addressed. Effective October 1, 1997, the company purchased the assets of Advanced Technology Systems (ATS), formerly an operating unit of Lucent Technologies, for approximately $284 in cash. ATS is a leading supplier of undersea surveillance systems, signal processing systems, vibration control systems, and related technologies for a wide range of applications. Operating results of ATS will be reported within the Marine Group beginning in the fourth quarter. The acquisition is expected to be immediately accretive to earnings. Combat Systems Group Results of Operations and Outlook Net sales and operating earnings increased during the three and nine month periods due primarily to the acquisition of Defense Systems and Armament Systems from Lockheed Martin Corporation on January 1, 1997. The acquisition has been accretive to the company's net earnings. For a discussion of the accounting for this transaction and related information, see Note B to the Consolidated Financial Statements. The operating margin of the Combat Systems Group for the year is expected to be similar to that reported for the first nine months of 1997. Business and Market Considerations Significant programs in which the Combat Systems Group participates, the upgrade of M1 tanks to the M1A2 configuration, the Advanced Amphibious Assault Vehicle, and the Crusader Self-Propelled Howitzer development program, were funded in the FY98 Appropriations Bill consistent with the company's expectations. Other Operating earnings increased during the three and nine month periods due to the improved performance of both the aggregates business and coal operations. The aggregates business improved due to increased sales volumes and cost reduction efforts, while the coal operations improved due to the suspension of mining activity at an unprofitable location. Backlog The following table details the backlog of each business segment as calculated at September 28, 1997 and December 31, 1996:
September 28 December 31 1997 1996 Marine Group $ 6,217 $ 7,566 Combat Systems Group 2,339 2,057 Other 684 727 Total Backlog $ 9,240 $ 10,350 Funded Backlog $ 5,716 $ 6,161
Total backlog represents the estimated remaining sales value of work primarily performed under authorized U.S. government contracts. Funded backlog represents the portion of total backlog that has been appropriated by Congress and funded by the procuring agency. The increase in backlog at the Combat Systems Group is due primarily to the acquisition of Defense Systems and Armament Systems. To the extent backlog has not been funded, there is no assurance that congressional appropriations or agency allotments will be forthcoming. Total backlog also includes amounts for long-term coal contracts. Additional Financial Information Interest, Net Interest income decreased during the three and nine month periods due to a decline in the average cash balance resulting from the acquisition of Defense Systems and Armament Systems on January 1, 1997. Provision for Income Taxes The company reached an agreement with the Internal Revenue Service, subject to approval by the Joint Committee on Taxation, with respect to its claim for additional research and experimentation tax credits. This agreement is expected to have a materially favorable impact on the company's results of operations and financial condition. For further discussion of this and other tax matters, as well as a discussion of the net deferred tax asset, see Note E to the Consolidated Financial Statements. Environmental Matters For a discussion of environmental matters and other contingencies, see Note G to the Consolidated Financial Statements. The company's liability, in the aggregate, with respect to these matters, is not deemed to be material to the company's results of operations or financial condition. New Accounting Standards The Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share" in February 1997 and No. 130, "Reporting Comprehensive Income" in June 1997. SFAS 128 requires a company to present basic and diluted earnings per share amounts on the face of the Consolidated Statement of Earnings. The company is required to adopt the provisions of the standard during the fourth quarter of 1997, and when adopted, will require restatement of prior years' earnings per share. The standard will not have a material impact on historical earnings per share reported by the company. SFAS 130 requires a company to report comprehensive income and its components in a full set of general-purpose financial statements. The company is required to adopt the provisions of the standard during the first quarter of 1998, and when adopted, will require reclassification of prior years' financial statements. There will be no material difference between comprehensive income and historical net earnings reported by the company. Financial Condition Operating Activities Cash flows from continuing operations decreased this year over last year due primarily to the change in the amount the company invested in marketable securities classified as trading per SFAS 115, "Accounting for Certain Investments in Debt and Equity Securities." Cash flows from discontinued operations improved this year over last year due primarily to lower allocated federal income tax payments. Investing Activities As discussed in Note B, the company acquired the assets of Defense Systems and Armament Systems on January 1, 1997 for approximately $450 in cash. Effective October 1, 1997, the company acquired the assets of ATS. This transaction resulted in a use of cash of $284 in the fourth quarter. On November 3, 1997, the company announced an agreement to purchase the assets of Ceridian Corporation's Computing Devices International unit. This transaction is expected to result in a use of cash of $600 in the fourth quarter. The company is considering an investment of approximately $200 to modernize the facilities at its Bath Iron Works shipyard commencing in 1998, for the purpose of improving productivity. Financing Activities In 1994, the company's Board of Directors reconfirmed management's authority to repurchase at its discretion up to three million shares of the company's common stock. As of September 28, 1997, the company had repurchased approximately 1.8 million shares, including approximately 0.9 million shares during 1997. The company expects to generate sufficient funds from operations to meet both its short-term and long-term liquidity needs. In addition, the company has the capacity for long-term borrowings and currently has a committed, short-term $600 line of credit. PART II GENERAL DYNAMICS CORPORATION OTHER INFORMATION September 28, 1997 Item 1. Legal Proceedings Reference is made to Note E, Income Taxes, and Note G, Commitments and Contingencies, to the Consolidated Financial Statements in Part I, for statements relevant to activities in the quarter covering certain litigation to which the company is a party. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit 11, Statement Re Computation of Per Share Earnings (b) Reports on Form 8-K None. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. GENERAL DYNAMICS CORPORATION by /s/John W. Schwartz John W. Schwartz Staff Vice President and Controller (Principal Accounting Officer) Dated November 5, 1997 EX-11 2 EX11.ASC Exhibit 11, 3rd Quarter 1997 Form 10Q, Commission File Number 13671 GENERAL DYNAMICS CORPORATION STATEMENT RE COMPUTATION OF PER SHARE EARNINGS (UNAUDITED) (Dollars in millions, except per share data)
Third Quarter Nine Months 1997 1996 1997 1996 NET EARNINGS $ 82 $ 68 $ 233 $ 200 Weighted average common shares outstanding 62,835,890 63,119,640 62,823,514 63,202,704 NET EARNINGS PER SHARE - PRIMARY $ 1.30 $ 1.07 $ 3.69 $ 3.15 Common Shares from above 62,835,890 63,119,640 62,823,514 63,202,704 Assumed exercise of options (treasury stock method) 439,987 273,627 324,726 234,809 63,275,877 63,393,267 63,148,240 63,437,513 NET EARNINGS PER SHARE - FULLY DILUTED $ 1.30 $ 1.07 $ 3.68 $ 3.15 Common shares from above 62,835,890 63,119,640 62,823,514 63,202,704 Assumed exercise of options (treasury stock method) 509,468 319,164 509,468 319,164 63,345,358 63,438,804 63,332,982 63,521,868
EX-27 3
5 This schedule contains summary information extracted from the General Dynamics Corporation Consolidated Balance Sheet as of September 28, 1997, and the related consolidated Statement of Earnings for the nine months ended September 28, 1997 and is qualified in its entirety to such financial statements. 1,000,000 9-MOS DEC-31-1997 SEP-28-1997 202 643 170 0 583 1888 1618 1110 3492 887 40 0 0 138 1718 3492 2961 2961 2632 2632 0 0 3 353 120 233 0 0 0 233 3.69 3.68
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